Employers have until Jan. 1 to comply with new wage tax law

Thursday

Dec 29, 2011 at 12:01 AMDec 29, 2011 at 3:30 AM

Time’s running out for businesses to comply with Pennsylvania’s Act 32, the local earned-income tax collection law that goes into effect Jan. 1.

While the law doesn’t change what taxes are paid, it does — for the first time — require all employers to collect local income taxes from workers. Currently, companies only have to withhold the tax if the municipality in which the business is located imposes one.

The law also creates a streamlined, countywide collection system that backers say will make collecting the taxes easier and more effective.

“We absolutely believe this is going to be a great thing for not only Pennsylvania businesses, but also for Pennsylvania taxpayers,” said James Mentzer, communications director for the Team Pennsylvania Foundation, a nonprofit that helps connect businesses with government. “The new law basically sets consistent collection standards across the state, which makes it easier for an employer to collect that tax, which they must do come Jan. 1.”

About 2,900 Pennsylvania municipalities collect local earned-income taxes. Until now, those taxes have been collected by 560 tax collection agencies that were hired by individual municipalities and school districts. Taxpayers paid those agencies and the agencies paid the boards or municipalities.

Starting Jan. 1, about 20 agencies will start collecting and remitting local taxes on behalf of the 69 “tax collection districts” that represent Pennsylvania’s 67 counties. The agencies were chosen by district boards.

“The underlying reason why Act 32 was created was to try to streamline this arcane process of dealing with all these various collectors of tax,” said attorney Dan Schulder, a tax law expert with Cozen O’Connor in Philadelphia. “For the most part, the collectors that were collecting the tax were sophisticated and money didn’t get lost in the system. But there were exceptions to that.”

Previous studies found that municipalities were losing more than $200 million in uncollected taxes.

Starting Jan. 1, employers must withhold taxes at the resident rate of where the employee lives, or at the non-resident rate where the employee works, whichever is higher. Those taxes are remitted to the agency for the district in which the business is located, which takes on the responsibility of sending the money where it needs to go.

“It really streamlines the process by eliminating the amount of tax collection districts there are,” said Steve Kratz, a spokesman for the Pennsylvania Department of Community and Economic Development, which is overseeing Act 32 implementation.

Say you work in Tullytown, but live in Quakertown. Your employer didn’t have to withhold earned-income taxes from your paycheck because Tullytown doesn’t have one. But the earned-income tax rate for Quakertown Borough residents is 1.5 percent. So, starting Jan. 1, 1.5 percent will be withheld from your paycheck and sent to the Keystone Collection Group, the tax agency chosen for Bucks County. Keystone will be responsible for remitting the tax to the borough and school district.

Kratz said the department has been reaching out to employers, business groups and payroll companies since the act was passed in 2008.

“We’ve done aggressive outreach through numerous avenues to make sure businesses are prepared,” he said. “We anticipate that they are. But you really won’t know until Jan. 1, when it takes effect. We’re prepared to move forward and address any issues that are out there at that time.”

Schulder, the tax attorney, said smaller companies that don’t work with a payroll service may be caught by surprise. But most should be on board already with the changes.

“It’s a process,” he said. “It’s going to take a little time. But at the end of the day, when the bugs get shaken out of the system, it will work better. The flow of dollars will be quicker. There will be more transparency, and more accountability.”

Crissa Shoemaker DeBree: 215-345-3186;

email: cshoemaker@phillyburbs.com;

Twitter: @bucksmontbiz

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